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Misleading IEA Statement Sends Oil Prices Crashing

The IEA (International Energy Agency) made the following statement in its Oil Monthly Report on Friday that supposedly sent oil prices lower by $2.41 per barrel for Brent and $2.21 per barrel for WTI:

“Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations. Output estimates for 4Q14 North American supply have been revised upwards by a steep 300 kb/d.”

IEA’s comments on U.S. oil production trends are misleading. When IEA says “oil” they mean “liquids” so their number includes natural gas liquids which add more than 3 million barrels per day on top of U.S. crude oil supply that largely come from natural gas production and not from oil production.

Also, IEA is talking about the 4th quarter of 2014 which is history and was unaffected by rig count declines that did not begin in earnest until mid-December.

The chart below shows EIA (U.S. Energy Information Administration) U.S. crude oil production data through February 2015 and forecasted volumes for the rest of the year. The greatest monthly increase was in December (190,000 barrels per day). This helps explain why IEA has revised its 4th quarter 2014 ouput numbers upward. Much lower monthly increases, however, of 60,000 barrels per day, characterized January and February and decreasing monthly volumes are forecasted going forward.

I believe that production will fall much sooner than either IEA or EIA suggest. IEA is giving an unduly pessimistic outlook that emphasizes production data before rig counts began falling and that downplays strong world demand data.

One final comment before moving on to the rig count: no one knows what U.S. production is yet for December, January or February. EIA and IEA ultimately get their U.S. production data from the states. State reporting on oil production is lagged by at least 3 months and it takes another month or two for adjustments to be included. IEA and EIA use sampling methods of certain large producers that are then put into algorithms to approximate recent production. So, what we get from these organizations is a pretty good guess that will be revised later. That is why it is so difficult to predict oil prices based on production much less rig counts.

The rig count for tight oil plays in the U.S. fell by 39 and the combined Bakken-Eagle Ford-Permian horizontal rig count dropped 23.

I will repeat what I have said in previous posts: the overall rig count is a practically meaningless number for those concerned about the direction of future oil prices. What matters is how the rig count is changing for the tight oil plays that contribute most to U.S. and world over-supply and low prices.

The latest EIA data for February 2015 indicate that the world supply surplus (production minus consumption) has narrowed to 560,000 barrels of liquids per day. Horizontal wells in the Bakken, Eagle Ford and Permian basin plays produced about 3.5 million barrels of crude oil per day in November 2014 (see table below). These are, therefore, the key plays to watch for rig count decreases.

The horizontal rig count for these key plays dropped 23 rigs this week and was down 36% from the 2014 maximum. The horizontal rig count for tight oil plays overall dropped 36 rigs this week and is 69% lower than the 2014 maximum. The drop in the shale gas rig count is significant but less than for the tight oil plays.

Summary rig count data for all plays is show in the table below. The plays with the greatest change from their respective 2014 maximum rig counts may be viewed as the least commercially attractive to producers. This suggests that the Barnett, Granite Wash, D-J Niobrara and Mississippi Lime plays are the least attractive. The reason that all of the shale gas plays except the Barnett have the lowest percentage drop in rig count from their 2014 maxima is unclear since none are commercial at current gas prices except parts of the Marcellus core.

The overall U.S. rig count for the week ending March 13, 2015 was 1,125 of which 1,069 were land rigs. Only about 25% of total land rigs and 11% of horizontal rigs are drilling outside of the major shale gas and tight oil plays.

All signs point to decreasing U.S. tight oil production and increasing world demand. Rig count continues to fall for the critical oil-producing plays and that means that things are on track for an oil-price recovery sooner than later.

Related posts

Why are most of the articles in oilprice.com are so pessimistic on US oil production?

Peter on March 17 2015 said:

Dear Mr. Berman,

You may be right that the IEA report is based on obsolete data. But unfortunately you're missing the point and you actually said it yourself: the last couple of months US production was still increasing, albeit at a lower rate than in December. The surplus may have narrowed but it's still a surplus, meaning that stocks keep building up in stead of declining and they will continue doing so for the time being, unless US production is curtailed significantly or until OPEC announces a production drop, both unlikely for the moment. Therefore it's not the IEA's fault that the oil price is crashing, is it? It's a simple supply-demand issue...

Peter

Johnny A. Franco Arboine on March 17 2015 said:

It's a no brainer. You cannot transport oil or gas by train. It's efficient. It's not practical. And it's not safe.

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